Should you continue with equity investment during an economic downturn ?

While  PPF is earning an 8% return,the equity fund is generating a low return. Most of investors are wondering if they should stop the SIPs in equity fund and invest only in the PPF for safety and return.



It is important to understand that when a goal needs growth,it is good to invest some money in equity.As an asset class,equity goes through economic cycles,and the current low level of returns is due to the down cycle in the Indian economy.By investing during this phase, it will allow the money to enjoy the benefits of the next up cycle.If you stop the SIPs, you will find that the overall returns after 15 years will be significantly lower,both on account of not investing in equity,and from investing,if at all,when the markets are higher.

An asset allocation strategy of below method is a good way to manage risks and earn a stable long-term return.
The downside risk from equity is arrested by the investment in the PPF,yet the upside of the portfolio will be capped at 8% if you were to invest all his money in it.

The goal for each of us individual should protect the investment from another possible downturn in the equity markets.Therefore,after staying invested in the next up cycle in equity,we should book out of equity with 3-4 years left for the goal,and put the money in the PPF or any other debt product (if the PPF limit for annual investment is breached) to protect the corpus.

Buying your first house?

Recently on weekends I met few of my newly wed friends. The topic was buy their own house.
And I came across the below article and do I share with all:
Newly-weds make up their minds to buy their own house. The first trigger came last year, when two of their close friends bought property. Then their landlord sounded the warning that he would raise the rent again. What sealed the decision was the salary hike  this year. "We might as well pay an EMI instead of giving rent to the landlord every month," comes the thought.
The couple is not alone. Many young people are planning to buy their dream houses, but have been held back by high property prices and an uncertain job market. This is prudent because the decision to buy a house should be based not just on the need, but also on the individual's financial readiness. It involves a big financial commitment, and one should go ahead only if one is absolutely sure.
As the festive season approaches, salesmen and agents are preparing to lure you with freebies and discounts. Here's how to see through some of their sales pitches and take a decision based on facts.

"You can never go wrong with property."

The first thing a builder or realtor is likely to tell you is that real estate prices never go down. In other words, don't think about the price, just go ahead and buy. This is also the wisdom you may have received from friends, relatives or parents, the people who had bought property earlier. However, what was true then may not be so now.

Real estate, like other asset classes, goes through periods of ups and downs. The only difference is that it is not as volatile as, say, stocks or gold. Property prices in some markets have been stagnant for the past 1-2 years. In fact, some areas have actually witnessed a fall in prices.

For young people, buying their own house is too tempting a thought. They feel it is better to pay the EMIs than the rent. However, staying on rent may not always be a bad idea. For instance, if you have just started your career, you may not be sure where you will settle down. So, instead of locking your funds in a house that you may not need immediately, you could invest to build a corpus for buying it later.

Also, remember that buying a house in a far-flung area may be cheap, but will come with other costs, including long commutes to office, children's school, weekend shopping, social visits, etc. As a tenant, you can choose a better location from where it is easier to commute to office and other destinations.

Don't fall for projections of high rental income from property if you are not planning to occupy it immediately. "No one can predict the rent a property will fetch in the future. These days, a reasonable annual rent is 4-5 per cent of the value of the property. However, in most cases, it is not possible to earn this much because property prices are very high," says Pankaj Kapoor, managing director, Liases Foras, a real estate rating agency.

If you are not planning to buy a house now, the best strategy is to be a pretend buyer and save for your dream house. If you keep putting away the EMI amount in a safe investment option, you will be able to save for a higher down payment when you eventually take the plunge.

"There may have been some correction in other areas, but we have not cut prices."

Recent media reports have talked about a correction in real estate prices, but if you mention this to the builder, he might laugh at you. Even if he agrees that some locations have witnessed a price correction, he will contend that the area where his project is coming up has not been affected. However, if you look around, you will see the signs.

A correction in the property market does not necessarily mean that the builder has brought down the prices. Even if there has been an increase in price in the past year or so, it effectively means a correction in real terms if one accounts for inflation. Likewise, steeper discounts than the previous year on the same property are a correction in real terms.

"The top 10 developers in the country are sitting on Rs 58,000 crore worth of unsold inventory," says Pankaj Kapoor, managing director of Liases Foras.

"This is the most affordable project in this area."

If a new project has 2-BHK flats priced at Rs 42 lakh each, when the going price in the area is Rs 50 lakh, isn't it a steal? Not really. The full-page ads in newspapers speak a lot about the facilities and features of the project, but miss out on an important detail—size of the flat.

A recent report by Jones Lang LaSalle, a property consultant, reveals that the average apartment size has come down in top metros in the country. In Mumbai, for instance, the average unit has shrunk 31 per cent in the past five years. "The median size of apartments across the country in 2008 was close to 1,600 sq ft. While this number continues to remain more or less the same in most other cities, the unit sizes in Mumbai have drastically reduced, and are currently 15 per cent lower than the national median size," says Ramesh Nair, chief operating officer (business), India, Jones Lang LaSalle. So, don't compare the price tag, but the price per square foot, to know whether a project is cheaper than the others.

Another ground rule is to not go by the price quoted by the builder for the flat because there will be a long list of attendant charges. You will have to pay extra for parking, club membership and preferential location. All these can add up to a significant amount.

"These rates will be revised soon."

IT's the favourite trick used by almost every builder to entice buyers. If you tell a builder that you need time to think it over, he will say that the project is almost sold out and prices will soon be revised upwards. The fact is that today developers are more desperate to sell than buyers are eager to buy.

Overheated markets, sliding stock prices and rising interest rates have made matters worse. While the IPO window is now closed, at least for the short-to-medium term, listed real estate stocks have taken a beating and tighter lending norms by banks have made capital scarce. Money is not cheap for builders, even if it is available. The only cheap source of money for developers is the sale of projects. This is where the discounts come in.

Given that the situation is unlikely to get better anytime soon, builders will continue to offer discounts to attract buyers even if it means taking a hit on their profit margins. The moment they realise that you are a serious buyer, most developers will be ready to negotiate.

"We will deliver on time since there's a penalty clause."

Project delays are a reality and very few are completed on schedule. Some builders do offer compensation for delays in handing over possession, but it's not something you can bank upon.

One, the amount offered will be nowhere close to the EMI you are paying. This is because you would be paying the instalment for the total cost of property, but the compensation offered will be linked to the base price, which does not include additional charges for parking, club membership, etc. Some builders slip in a clause in the agreement, which insulates them against any claim by the buyer. Others have an upper limit for the compensation they will pay.

Most, however, have a clause in the agreement which states that if the project is delayed because of 'factors outside their control', they will not be liable. "It is in the interest of the potential buyer that the purchase agreement include a clause which mentions the date on or before which the developer will hand over the possession of his property," says Ravi Goenka, advocate at Goenka Law Associates. "There have been instances when the developer has included a price escalation clause in the agreement, mentioning that the potential buyer would need to bear the additional cost in case there is a delay in the project," he adds.

Take a good look at the sale agreement because these points are hidden away in the fine print. There have also been cases where cheques issued for these penalty charges have bounced. Getting a compensation from the builder is easier said than done. Prevention is your best bet.

"What you see is what you get."

Is neither true for the price quoted by the builder, nor for the sample flat that you see at the construction site. The latter may look like the perfect home you have been dreaming of, but the reality is quite different. The interior designers hired by the builders to do up the sample flats are experts at creating optical illusions. They know how to use lighting and place furniture in such a way that the house appears bigger. Even the furniture is an accomplice in this charade. The customised beds and dining table sets are smaller than the normal size and the cupboards lack depth.

A gullible buyer is likely to think that the bedroom will have enough space to move around even after placing a double bed and a study table. The sample house itself may be much bigger. Such flats are made only for marketing and, therefore, the walls are much thinner than those in a normal structure. Some of the walls may just be plywood partitions, which help add precious square inches of carpet area to the house and make it bigger.

However, there is no way you can compare the sample with the real. These flats are demolished after the units in the project are sold out and construction begins. There is also the issue of location. Sample flats are standalone units that offer a great view from every balcony and window. It may not be so when it is a part of a cluster of flats.

For a buyer, a better indicator of what he will get is the architectural drawing of the apartment, as well as the layout map of the project. These drawings will tell you the exact carpet area of the flat. Compare it with the super area promised by the builder and you will get a fair idea of the price being charged for common facilities. These will also tell you whether the flat will overlook a sprawling park or stare into the neighbouring tower.

"A potential buyer should make a note about all the things shown by the developer or his representative. Later, you can crosscheck whether these would be part of your house or not," says Pankaj Kapoor, managing director, Liases Foras.

"You can take your money back any time you want."

Don't take the builder's word for it. Getting a refund from a cash-strapped company is not easy. The salesperson who is hawking the property is focused sharply on the down payment. He knows that once you have done that, you won't be able to get out as easily. There is no norm that builders are required to follow while cancelling bookings. While some builders deduct 10 per cent of the booking amount, others quote the same figure on the 'cost of property'. Yet others deduct up to 20 per cent, whereas smaller developers may forfeit the entire booking amount.

The only way to avoid getting into a situation like this is to do your homework before you book an apartment. As the cancellation fee varies wildly, shop around before you give the cheque. Even after you have decided on a project, avoid paying the booking amount in cash. This is because some developers don't give the receipt till you pay the full booking amount. If the rest of the amount is in the form of a cheque or demand draft, the builder may issue a receipt for this amount alone, claiming to adjust the cash in the balance payment. So, insist on a receipt for the full amount.

If you do decide to buy a property, look at the sale agreement very carefully. "Read the document and avoid making any payments or signing documents if you are unsure," says Goenka. "The contract is binding on both the parties, and if any one of them fails to fulfil his commitment, it automatically gives the other party the right to term the contract null and void," he says.

"The freebies bring down the effective cost."

Freebies are the flavour of the season. From registration fee to modular kitchens, even cars, all are being offered when you book an apartment in a project. Don't fall for these lures. All freebies are already factored into the price of the apartment.

The same goes for the attractive schemes on offer. The truth is that developers urgently need the cash and many of the projects have not even got approvals from the authorities. This puts a question mark on these projects.

Another such lure is the 'attractive' financing schemes that builders offer by tying up with banks and housing finance companies. In most cases, you will get a better deal by approaching the bank directly.

The bottom line is, don't look for freebies; try getting a cash discount instead. "Developers are doling out discounts and incentives, which is a direct result of the lack in demand. So, though they may not agree in open, the serious buyer would be able to get a decent discount on the deal," says Pankaj Kapoor of Liases Foras.

"Don't worry about the loan. We have tie-ups with banks."

Builders do have tie-ups with banks, but this is no way an endorsement for the project. "Even if the project has been approved, it is advisable for the buyer to hire the services of a legal expert to verify the authenticity of all the documents associated with the project," says Goenka. According to him, there have been instances when the developer has reneged on his promises even when the project has been approved or has had an association with a bank.

A tie-up also does not promise the best home loan rate. What it means is that you are more likely to get a loan from those banks than with others. However, for the best rates, you may still need to go to the bank branch to negotiate, instead of relying on the representative at the bank site, a person who may not even be from the bank. You may also be told not to worry about the high home loan interest rates as 'rates will come down soon'.

Sure, home loans may get cheaper but they may also get costlier. Plan your purchase according to the current interest rate, not on the expectations of a future rate cut. The new RBI governor has done a lot to boost the market sentiment, but hasn't cut interest rates. The situation may continue.

Also, banks are usually aggressive in offering competitive rates to new customers, but are not so charitable once you take the loan. This means that any subsequent drop in rates may not be passed on to you immediately. So, it is better not to stretch your finances and plan it on the basis of a higher interest rate than the one you are currently paying.  

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Financial mistakes young investors should avoid

If the youth want to build long-term wealth,they should do away with lame excuses about managing money and develop good financial habits that can serve them well in later life.

I have discovered a common characteristic among the young people who have begun to earn and feel good about it.They do not engage seriously with money or investment decisions.There are several excuses not enough money;too many choices;very complex;uncertainty about where to start;too much paperwork.While they procrastinate about money,they allow their money life to play out by default.Lets consider a few common issues.

First,many young earners think that managing money is complex and is not for them.This is when they have already opened a bank account,taken a credit card,and a loan for a motor vehicle.Money decisions have to be taken by default or design once you start earning.The simplest way to understand personal finance is to see yourself as an asset that generates income.If you save and invest,you are buffering the income.If you spend more than you earn,you need a higher or an alternate source of income.If you borrow,you create a liability and take away from the future income.Beyond these four ideas of your assets,the income they make,the expenses you incur and the loans you take,there are no personal finance decisions to take.Evaluate every money decision in this context.

Second,youngsters tend to whine and complain when the world they see and experience is different from the comfort zone that they are used to.They revel in the problem,become cynical,crib about how it makes their life difficult,and spend too little time on solutions.Protective parents make the process of growing up tougher.The simple rule is that money decisions require action,and this calls for evaluating the alternatives and making a decision.I have known of intelligent students processing complex case studies in class,but unable to fix a healthy meal for themselves at the hostel.They do not see that this problem also requires a similar solution-oriented approach,with real-life constraints of time,energy,resources and skills.The 2-minute noodle has been a hostel staple for way too long.This quick-fix approach continues in the young peoples money lives,where the search is for quick,comforting solutions that are easy to arrive at.Young investors need to think strategically as if they were a business unit.Without this orientation,they may remain clueless earners,who do not know how to take money decisions.

Third,procrastination about money is simply irresponsible behaviour. There are several youngsters who have not opened their bank statements,havent deposited the dividend cheques,not filed the tax returns,or completed the KYC process with a mutual fund or broker.They have a PAN card since the employer insists on it.The taxman would want to know if they can establish how they built their assets,and whether they paid the taxes on their income before doing so.Those who share transactions for fun also create short-term capital gains that are taxable,and there are penalties for not paying these.Assuming you wont get caught is a bad idea. Keep empty shoe-boxes to store statements,bills,papers,and notices and take the time to sort them periodically.Form groups to know how to file your tax and do it on time.These habits,if developed early on,will help as you move up in your career and can afford to hire someone.You can avoid being ripped off if you deal with your paperwork in the early days.

Fourth,several young investors are overconfident about their future incomes.They believe that they can find a new job since a growing economy like India would have opportunities.They also are big spenders since they do not visualise a dark future for which they have to set money aside.Instead of defining saving as the amount left after spending,it might be a good idea to set some money aside right at the start.The direct debit options that take money away from the salary account,systematic investment plans that ensure money is invested regularly,and deposits that are created when the savings account reaches a limit,are all good options to ensure disciplined saving.To spend is to make the seller rich;to save is to make ourselves wealthy.It always makes sense to pay ourselves before paying everyone else.

Fifth,young investors are very tech-savvy
and should find out how modern technology can impact their financial lives.
The high default in educational loans comes from ignorance about technology that credit bureaus can use to aggregate repayment records.When the home loan is rejected because one fails to pay an education loan,it is too late and expensive to make amends.The core banking solutions ensure that money can be easily accessed,used and transferred without recourse to a physical branch,by using Internet and mobile banking instead.This,however,also means dealing with new risks of password protection,guarding against phishing and Internet frauds,and keeping an eye on salesmen who ask for account access to make it easy.It is now possible to aggregate all the money transactions into applications that help budgeting,spending,investing,and recordkeeping.The youngsters should leverage their ease with technology to make money transactions simpler and more efficient.

Sixth,many young investors start at the wrong end of the investing spectrum.Several think that speculating in stocks,buying a few IPOs,or conducting derivative transactions are the easiest ways to make money.It is pertinent that various management schools have stock and derivative trading games,not ones on asset allocation.The former is a high-adrenaline activity that creates a buzz;the latter is a life skill,but quite boring.A solid foundation for creating wealth is through simple and staid products,such as fixed deposits and PPF accounts.Diversified large-cap mutual funds and bonds can be added to this gradually.Speculation comes last,and should only contribute marginally.Young investors need do build a solid base first.

Young investors have time on their side.Anyone who has dealt with money will be able to tell you how magically compounding can work if good investment decisions are taken early on.It will be a pity if this is frittered away due to procrastination or unwillingness to learn the ropes

MFs: One-stop shop for investors

Mutual funds offer a range of options that can cater to the various investment needs of investors.Depending on their need,suitability and risk profile,investors can select funds best suited to them.Based on the asset class they invest in,mutual funds can be categorized as follows:

Equity-oriented funds

These funds invest in shares enabling investors to benefit from investment opportunities in the stock market.They tend to be high risk-high return investment propositions.There are various types of equity funds.

Large-cap :

These funds primarily invest in the shares of well-established companies.Broadly speaking,the top 100 companies by market capitalization would form the investment universe for these funds.

Mid/small-cap :

These funds target companies whose market capitalization is lower than that of large cap companies.Prices of mid/small cap stocks tend to be more volatile than those of their large cap peers.

Equity-linked savings scheme (ELSS):

These are equity funds offering taxbenefits.Investments of up to Rs 1 lakh in a financial year are eligible for tax sops under Section 80C of the Income Tax Act.ELSS investments are subject to a lock-in of three years.

Index funds:

They try to replicate the performance of a chosen benchmark index such as S&P BSE Sensex or CNX Nifty,by investing in the stocks that constitute the index and in exactly the way these stocks have their weight in the index.

Sector funds:

These funds focus only on stocks from a certain sector such as healthcare,technology,financial services etc.These funds perform at their best when the targeted sector is in favour.

Debt-oriented funds

These funds invest in fixed income instruments such as bonds,debentures and government securities.From the risk-return perspective they are less risky and have lower return potential than equityoriented funds over the longterm.There are different types of debt funds which are categorized based on their investment tenure.

Liquid funds:

These funds primarily invest in money market instruments with maturities of up to 91 days.Liquid funds expose investors to low interest rate risk and are apt for parking monies over shorter time periods.A similar category is that of Ultra short term bond funds.The primary difference between liquid and ultra short term funds is that the latter types hold slightly longer tenured instruments and are apt for investors with an investment horizon of upto a year.

Bond funds:

These funds invest a bulk of their assets in bonds and debentures,and could make smaller allocations to money market instruments and government securities.Bond funds can expose investors to credit and interest rate risks.Investors can select an apt variant based on their investment horizon: Short-term bond funds (1-3 years); Intermediate bond funds (3-7 years) and Longterm bond funds (over 7 years).

Government bond funds:

These funds primarily invest in securities issued by the central and state governments.Unlike bond funds,investors here are only exposed to interest rate risks.Investors can select between Short-ter m gover nment bond,Intermediate government bond and Long-Term government bond funds.

Fixed maturity plans:

FMPs are close-ended debt funds with a fixed time to mature.They invest in a host of debt instruments whose maturity is either lower than or coincides with that of the FMP.They are best suited for investors whose investment horizon matches the FMPs tenure.

Allocation funds

These funds provide benefits of asset allocation by investing across asset classes.The most popular variants are balanced funds and monthly income plans (MIPs).
Balanced funds typically invest at least 65% of their assets in equities and the balance in debt,mainly to take some tax advantages.MIPs on the other hand invest roughly around 70%-80 % of their assets in debt instruments and the balance 20%- 30% in equities.
Finally in recent years,Gold funds have attracted a lot of investor interest.Simply put,these are funds investing in units of gold exchange traded funds (ETFs),offering exposure to gold via the mutual fund route.